What happened
Shares of financial technology-specialist Square , streaming-TV company Netflix , and visual search and media platform Pinterest were all hit hard on Thursday. The three stocks ended the day down 2.4%, 3.5%, and 2%, respectively. But shares of these companies were all down about 5% at their worst points during the trading day.
The three stocks’ declines reflect broader market bearishness toward growth stocks. This has been an overarching theme in the market since mid-February, with growth stocks getting hit particularly hard during the last few trading days.
So what
Since Feb. 15, shares of Netflix, Pinterest, and Square are all down 9%, 19%, and 23%, respectively. This compares to only a 0.6% decline for the S&P 500. With all three of these companies squarely fitting the definition of a growth stock, it’s not surprising to see them getting hammered along with most other stocks in the same category.
Of course, growth stocks may have been overdue for a breather. They had a huge run-up in 2020. For instance, Square, Netflix, and Pinterest stocks soared 248%, 254%, and 67%, respectively, in 2020. This compares to a 16% gain for the S&P 500.
Now what
Investors shouldn’t worry too much about these stock-price movements. It’s important to remember that stocks are more attractive investments at lower prices than they are at higher prices, assuming everything else about a business’ long-term prospects is unchanged — and for Netflix, Pinterest, and Square, this seems to be the case.
All three of these companies are firing on all cylinders as the economy reopens. Consider their fourth-quarter results. Square’s fourth-quarter revenue increased 23% year over year when excluding Bitcoin revenue. Its gross profit surged 54% year over year to $804 million.
Netflix’s fourth-quarter revenue increased 21.5% year over year as streaming members reached 204 million — up from 167 million in the fourth quarter of 2019. Finally, Pinterest’s fourth-quarter revenue skyrocketed 76% year over year as monthly active users jumped 37% year over year to 459 million.
Looking ahead, analysts expect more strong double-digit top-line growth from all three of these companies in 2021. Even more, analysts are modeling for outsized earnings growth over the next five years as the three companies’ scalable business models benefit from significant operating leverage.
While all three of these stocks weren’t cheap before they began selling off, it’s important to note that their business models, competitive positioning, growth trajectories, and long-term earnings potential justify premium valuations.
Investors may want to look closer at stocks like these to see if this recent sell-off represents a potential buying opportunity.